The naysayers have it wrong, the Fed chair is doing her job
The consensus among Fed-watchers is that at Federal Reserve Chair Janet Yellen’s first news conference on Wednesday, she made her first gaffe. If you can spot what she did wrong, maybe you have what it takes to be a Fed-watcher.
OK, here’s the setup. The Fed had announced that after completing its efforts to buy bonds to juice the economy, it will maintain rock-bottom interest rates to juice the economy for “a considerable period.” Yellen was asked what “a considerable period” meant, and that’s when she supposedly slipped up.
“It’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing,” Yellen said. “But, you know, it depends.”
Was her mistake being too vague? Was it watering down her answer with six separate qualifiers? Was it general incoherence?
No, sorry, central bankers are supposed to be vague and incoherent. Yellen’s alleged error, believe it or not, was excessive specificity. Fed-watchers objected to “six months,” no matter how much she qualified it with “hard to define,” “probably,” “something on the order of,” around,” “or that type of thing,” and “it depends.”
At this point, you might think that Fed-watchers are a bit silly. You would not be wrong. Yellen was talking about decisions she won’t confront until early 2015 at the earliest. The overwhelming thrust of her remarks was that the Fed is basically staying the course, keeping its foot on the economic gas with extremely loose monetary policy for the foreseeable future. But even aside from her gaffe, markets and market analysts reacted as if she had announced she was tapping the brakes.
Let’s just review where things stand. The Fed’s key interest rate has been essentially zero for more than five years, and the Fed expects it to stay that way for quite a while. The Fed is providing additional monetary stimulus through “quantitative easing,” buying government securities to boost economic activity. In December, the Fed announced it would “taper” its bond-buying, and it has reduced its purchases by $10 billion a month, but it will still blast another $55 billion into the economy in April. It’s not tapping the brakes; it’s just applying a smidgeon less gas.
Ever since former Chairman Ben Bernanke started talking about the taper almost a year ago, Fed-watchers have been wigging out about the end of easy money. The fear was that the taper would boost long-term interest rates and kill the recovery. But since the taper began, long-term interest rates have not gone up at all. The stock market has done fine. The labor market has improved modestly.
The downside of loose monetary policy is that it can trigger inflation. But after years of extraordinarily loose policy, inflation is still well below the Fed’s 2 percent target. It’s too low. And 6.7 percent unemployment is still too high. The Fed had suggested last year that it would consider tightening policy after unemployment dropped to 6.5 percent, but Yellen put the kibosh on that on Wednesday. Instead, the Fed will monitor the data and react accordingly, as it always does.
Nevertheless, Fed-watchers seemed to conclude that Yellen was being more hawkish than expected, showing too much confidence in relatively optimistic Fed forecasts that have been overly optimistic in the past. “Yellen Debut Rattles Markets,” the Wall Street Journal reported. “Federal Reserve Lays Groundwork For First Interest Rate Hike,” the Washington Post concluded.
Well, someday, sure. If you parse her words carefully enough, maybe Yellen’s rhetoric was marginally more hawkish than expected. But she was also explicit: Her main concern is jobs, not inflation, and loose money is still appropriate.
“Unemployment is still elevated,” she said. “Underemployment and long-term employment remain significant concerns. Inflation is still running significantly below [our] objective. These conditions warrant the continuation of highly accommodative policy.”
There weren’t any qualifiers in that statement. Yellen just said the Fed is going to keep doing what it’s doing. Unless you’re playing in the bond markets, or have some other business reason to focus on potential quarter-point differences in 2015 interest rates, that’s pretty much all you need to know. But if you think Yellen’s clear statement of policy means more than her off-the-cuff, highly-hedged, inscrutable definition of “a considerable time,” well, you’ll never be a Fed-watcher.